Hello, my friends!
It was another ultra-busy week in the economy, one that saw a variety of fresh data emerge, including new numbers on inflation, business activity and consumer confidence. But among the week’s biggest news was Federal Reserve Chair Jerome Powell’s appearance on Capitol Hill, where he delivered his latest Semiannual Monetary Policy Report to Congress.
Powell Emphasizes Policy Caution in Report to Congress
As you might imagine, the near-term outlook for interest rates was the most prominent topic throughout Powell’s testimony. The chair spent much of his time explaining the central bank’s cautious approach to any further policy-loosening, and attributing that caution to what he said is persistent uncertainty about just how the Trump administration’s tariff agenda ultimately may impact prices.
Powell testified before the House Committee on Financial Services on Tuesday and in front of the Senate Committee on Banking, Housing, and Urban Affairs the following day, delivering identical prepared remarks to each body.
In those remarks, the Fed chair defended the wait-and-see approach he says central bankers are taking now with respect to monetary policy as tariff impacts work their way through the economy.
Tariff consequences “could be large or small,” Powell noted. “It is just something you want to approach carefully. If we make a mistake people will pay the cost for a long time.”
The chair also said that members of the Federal Open Market Committee are “well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.”
In his direct exchanges with lawmakers, Powell unsurprisingly found himself the target of those frustrated with the chair’s reluctance to drop rates amid signs of slowing inflation. Ohio Republican Senator Bernie Moreno went as far as to effectively accuse Powell of playing politics with monetary policy, telling him, “You should consider whether you’re really looking at this from a fiscal lens or a political lens, because you just don’t like tariffs.”
But during his two days of testimony, Powell did indicate that he is, in fact, open to lowering rates in the near future if the data justifies doing so.
“I think if it turns out that inflation pressures do remain contained then we will get to a place where we cut rates sooner rather than later,” Powell told Republican Representative Mike Lawler on Tuesday.
As things stand right now, however, few are expecting to see a rate cut before September, with more than 80% of traders betting that the benchmark fed funds rate will remain at the current target range of 4.25%-4.5% through the July policy meeting.
Fed’s Favorite Inflation Measure Shows Price Pressures Reintensified Last Month
In fact, the prospect of a rate cut in July likely diminished further following the release this week of the personal consumption expenditures price index numbers for May, which showed that inflation pressures moved in the wrong direction last month.
On Friday, the Commerce Department reported that headline PCE increased in May at a monthly rate of 0.1% while the year-over-year rate rose at a pace of 2.3%. Both numbers were in line with the expectations of economists surveyed by Dow Jones, but the annual pace represents an acceleration by a tenth of a percentage point over the April rate.
The more disconcerting news was delivered by core PCE, which strips out volatile food and energy prices to get a more accurate look at underlying price pressures. Core rose 0.2% for the month and 2.7% year over year…each a tenth of a point faster than both the April results and economists’ projections.
Notably, the PCE report also showed unexpected drops in consumer spending and personal income last month (-0.1% and -0.4%, respectively), data which otherwise might prompt policymakers to more seriously consider a rate cut next month.
But economists say that as long as inflation is inclined to reintensify, the central bank will sit tight, with Eugenio Aleman, chief economist at Raymond James, suggesting that Friday’s data “will continue to keep the Federal Reserve on the sidelines for now.”
Key PMI Data Suggests Continued Resilience Among Manufacturing and Services Sectors
Also this week, a widely followed set of numbers suggested that business activity in the U.S. remains resilient despite the ongoing threat of potential tariff-related disruptions.
On Monday, the folks at S&P Global revealed that its Flash U.S. Composite Purchasing Managers’ Index ticked down in June but still reflected a solid pace of overall activity this month across both the manufacturing and services sectors.
Composite PMI came in at 52.8…slightly off May’s 53 reading but above the critical level of 50 that separates expansion from contraction in these kinds of diffusion indexes as well as above the 52.2 measure that had been projected by economists.
As for the sector-specific indexes, each of those also landed on more solid footing than economists expected. Flash Manufacturing PMI held at 52 for the second month in a row, higher than the consensus estimate of 51, while Flash Services PMI came in at 53.1…a little off May’s 53.7 but better than the 52.9 that was anticipated.
Note that Flash PMIs are advance estimates of the final numbers that come out at the end of each month and calculated using roughly 85% to 90% of the survey responses.
Commenting on the June numbers, Chris Williamson, chief business economist at S&P Global Market, emphasized the possibility that business conditions may deteriorate from here, saying, in part:
“The June flash PMI data indicated that the US economy continued to grow at the end of the second quarter, but that the outlook remains uncertain while inflationary pressures have risen sharply in the past two months.”
Consumers Grew a LOT More Pessimistic in June
Finally this week, we received some especially unwelcome news from The Conference Board on Tuesday in the form of its Consumer Confidence Index for June.
It seems the index sank more than five points this month, dropping to a reading of 93 from the 98.4 recorded in May and coming in well below the measure of 99 expected by economists.
The June number also marks the fourth straight month the index has fallen short of the neutral reading of 100. Measures below 100 imply greater pessimism among Americans.
The board reported that respondents to its survey remain particularly concerned about the impact that tariffs still may have on the economy and prices.
On that note, the Expectations Index … a component measure of the overall index … tumbled 4.6 points to come in at a measure of 69. The Expectations Index gauges consumers’ six-month outlook for the economy, and according to The Conference Board, readings below 80 imply a recession could be ahead.
“Consumer confidence weakened in June, erasing almost half of May’s sharp gains,” said Stephanie Guichard, senior economist at The Conference Board. “The decline was broad-based across components, with consumers’ assessments of the present situation and their expectations for the future both contributing to the deterioration.”
“Consumers were less positive about current business conditions than May,” Guichard added.
That’s it for now; have a marvelous weekend!
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